Morgan Stanley has released a research report projecting that ASML (ASML.US) could deliver another positive earnings surprise in the third quarter, driven by sustained robust demand in both memory and logic foundry segments. The bank anticipates quarterly revenue may surpass the upper end of the company's previously provided guidance. Alongside this optimistic outlook, Morgan Stanley has raised its earnings forecasts for ASML for 2026 and 2027, reaffirming an "Overweight" rating with a €1,700 price target (approximately $1,950) and maintaining the stock's status as its top pick in the European semiconductor sector.

The investment bank notes that significant uncertainty remains regarding the 2028 growth trajectory, and management's commentary on EUV production capacity and the Chinese market could be critical for the stock's performance into year-end. Morgan Stanley expects ASML to announce its third-quarter 2026 results on October 14. The firm believes the market currently undervalues the strength of recent demand from memory and logic foundry customers, projecting third-quarter revenue of €12.3 billion—roughly 5% above the consensus estimate of €11.7 billion and exceeding the company's own guidance ceiling. Earnings per share for the quarter are estimated at €11.75, compared to the market expectation of €10.84.

This momentum is expected to extend into the fourth quarter, with Morgan Stanley forecasting revenue of approximately €14.5 billion and a gross margin expanding to 57%. Full-year revenue for 2026 is projected to reach around €45 billion, positioning at the upper end of ASML's €43 billion to €45 billion guidance range. The bank estimates 2026 EPS of roughly €41, about 5% above consensus. However, following ASML's substantial upward revision of its full-year 2026 revenue guidance last quarter—from the prior €38 billion to €40 billion range to the current €43 billion to €45 billion—Morgan Stanley believes the scope for another large guidance hike this quarter is somewhat limited. Investors are likely to focus more on management's latest perspective on production capacity, the Chinese market, and order trends heading into 2028, rather than purely on financial results.

Earnings Projections Raised for Next Two Years; 2028 Growth Momentum Still Under Scrutiny

Based on assessments of recent demand and profitability improvements, Morgan Stanley has significantly lifted its earnings projections for ASML for this year and next. Specifically, the bank has raised its 2026 revenue and EPS forecasts by 4% and 7% respectively, while 2027 estimates have been increased by 9% and 14%. The bank attributes this to value-based pricing strategies and a broadening base of foundry customer demand, which together are expected to drive margin improvement and support sales growth for both DUV (deep ultraviolet) and EUV (extreme ultraviolet) lithography equipment.

After these adjustments, Morgan Stanley projects ASML's 2026 revenue at approximately €44.981 billion, representing about 38% year-over-year growth, followed by €55.607 billion in 2027, a further increase of roughly 24%. Earnings per share for these periods are estimated at €40.99 and €55.64, respectively. Looking ahead to 2028, the bank forecasts revenue climbing to €60.484 billion with EPS of €62.32. However, Morgan Stanley suggests the key question for the market has shifted from earnings upgrades in the near term to whether growth can continue to accelerate in 2028. While the bank has raised its 2028 revenue and EPS estimates by 7% and 10%, this adjustment primarily reflects the higher 2027 base rather than evidence of accelerating demand. Current projections indicate growth momentum can be maintained, but clear signs of acceleration have yet to emerge. Under this forecast, ASML's revenue growth would decelerate from roughly 38% in 2026 and 24% in 2027 to about 9% in 2028, making order visibility and customer capital expenditure plans crucial for assessing the company's next-stage valuation potential.

EUV Production Capacity Expected to Expand Further; 98 Units Projected for 2027 Shipments

Production capacity stands out as another major focal point for the upcoming earnings release. Morgan Stanley notes that while the market has previously worried ASML might struggle to deliver more than 85 Low-NA EUV systems next year, recent manufacturing efficiency improvements offer greater capacity flexibility than market expectations suggest. The bank projects ASML management may raise its 2027 EUV capacity guidance above 90 units while reiterating the capability to produce at least 110 Low-NA EUV tools by 2028. Nevertheless, whether end-customer demand will ultimately match this output level remains to be seen. From a shipment forecast perspective, Morgan Stanley expects EUV shipments to increase from 46 units in 2025 to 74 units in 2026, reaching 98 and 103 units in 2027 and 2028 respectively. This indicates EUV will remain a key growth driver for ASML's equipment business over the next two years.

Additionally, ASML's expansion project at the Brainport Industries Campus (BIC) in the Netherlands is expected to progress between 2028 and 2029. Morgan Stanley believes the initial phase will support DUV system production before gradually transitioning toward EUV manufacturing, creating additional space for further EUV capacity expansion beyond 2029.

China Market Risks Remain a Concern; Domestic Memory Expansion Could Support DUV Demand

Beyond production capacity, the Chinese market continues to be a significant variable for investors. Morgan Stanley points to two primary concerns: competition from domestic Chinese semiconductor equipment makers and the potential for further export restrictions. These risks could continue to weigh on ASML's valuation levels. However, the bank suggests the market may be overlooking the potential demand arising from ongoing capacity expansion by Chinese memory chip manufacturers. Morgan Stanley's Asia-Pacific team projects that Chinese memory companies will increase their global market share by 2028. Specifically, ChangXin Memory Technologies is expected to surpass Micron Technology (MU.US) as the world's third-largest DRAM manufacturer, while YMTC could become the second or third-largest NAND producer globally. The bank estimates 2028 global DRAM capacity will reach approximately 3.374 million wafers per month, with ChangXin accounting for about 15%—corresponding to roughly 500,000 wafers monthly. Morgan Stanley believes capacity expansion by emerging Chinese memory makers could become a demand driver for ASML's DUV equipment in 2027 and 2028—a potential tailwind not yet fully priced into the market. Notably, ASML has previously indicated that China sales will account for approximately 20% of total revenue, broadly consistent with levels seen in recent years. Meanwhile, the company previously guided Low-NA EUV capacity to increase to around 85 units and 110 units for 2027 and 2028 respectively.

Memory and Advanced Logic Demand Together Provide Support; ASML Maintained as Top Sector Pick

From a demand structure perspective, Morgan Stanley believes ASML's next two years of growth will not depend on any single market. In memory, continued expansion of HBM and DRAM demand is expected to drive increased capital spending among memory manufacturers. In logic, the recovery of investment by advanced-node foundry customers will continue to sustain EUV equipment demand. Additionally, as the installed base of EUV systems grows, ASML's service business is positioned for increased recurring revenue. The bank projects ASML's 2026 gross margin will improve to 55.3% from 52.9% in 2025, further rising to 55.6% in 2027. EBIT margin is expected to expand significantly from 34.7% in 2025 to 41.2% in 2026, reaching 43.7% in 2027.

On valuation, Morgan Stanley maintains its "Overweight" rating on ASML and continues to designate it as the preferred pick within its European semiconductor coverage, with a price target of €1,700. Based on the September 16 closing price of €1,396.20, this target implies approximately 22% upside potential. The report highlights ASML as the company within the bank's European semiconductor coverage most likely to deliver an earnings beat this quarter. Morgan Stanley bases its valuation on 2028 estimated EPS of €62.32 and a 27x price-to-earnings multiple. The bank believes significantly increased foundry capital expenditure, a broader foundry customer base, and continued strength in memory chip prices could offer further upside potential. However, given the lack of clear evidence for 2028 growth acceleration and lingering China market risks, the bank has shifted its valuation multiple reference from prior cyclical peak ranges to the upper end of the normal cyclical range.